Guide · Your First Cost-Type Award
You just won a cost-plus contract. Here is what has to happen before you bill.
A cost-reimbursement award changes what your accounting has to do, not just how much of it there is. Three things have to be true before your first invoice goes out, and most companies discover them in the wrong order.
- 12 years inside DCAA
- 100+ DoD contractors audited
- CPA led
- First cost-type award a specialty
- Remote, nationwide
The short answer
On a fixed-price contract you deliver and invoice the price. On a cost-reimbursement contract the government pays what you actually spent, within limits, plus a fee. That single difference pulls your accounting system into the contract.
Three things have to be true before your first voucher is worth submitting:
- Your accounting system can accumulate cost by contract and keep direct and indirect cost apart.
- You have billing rates you can defend, because you cannot invoice indirect cost without a rate.
- Every hour your people work is recorded, including hours on other jobs and overhead, because a labor dollar is only allocable if the whole day is accounted for.
None of those are software purchases. They are decisions about how your books are organized, and they take weeks rather than days.
Fixed price vs cost type
What actually changes
| Firm-fixed-price | Cost-reimbursement | |
|---|---|---|
| What you get paid | The agreed price, whatever it cost you | Allowable cost incurred, plus the fee |
| Who carries overrun risk | You | The government, up to the funded ceiling |
| Accounting system | Not evaluated | Must be acceptable before award |
| Timekeeping | Your business | Tested against payroll and billings |
| Indirect rates | Priced once, in the proposal | Billed provisionally, then settled every year |
| Year-end obligation | A tax return | A tax return and an incurred cost submission |
| Who sees your books | Nobody | An auditor, eventually |
The right-hand column is what people mean when they say a cost-type contract is harder. The work is not more complicated month to month. It is that somebody checks it.
Week by week
The first 30 days
Read the contract for the clauses, not the scope
Find the Allowable Cost and Payment clause (FAR 52.216-7), the fee clause, and whether you have Limitation of Cost or Limitation of Funds. Those four decide how you bill, what gets withheld, and when you must warn the government you are running out of money.
Set up cost by contract before you spend anything
Every dollar needs to land somewhere defensible from day one. Reconstructing three months of coding later is the single most expensive cleanup we do.
Turn on timekeeping for everyone
Not just the people on the contract. Total time has to be recorded, because indirect allocation depends on the whole labor base, and a floor check asks anybody.
Build the indirect rate structure
Decide the pools, decide the bases, take unallowable costs out, and document why. This is the part that takes judgment rather than data entry.
Submit provisional billing rates
You cannot bill indirect cost without rates in place. Submit them, get them approved or at least acknowledged, and bill at those rates until the year is settled.
Close the first month properly and look at it
Labor to payroll, job cost to the general ledger, rates applied, unallowables excluded. If the first close ties, the rest of the year is maintenance.
The piece people skip
Billing rates, and why you cannot skip them
Direct cost is easy to invoice: those hours, those materials, that travel. Indirect cost is the problem. Your fringe, your overhead and your G&A are real costs of performing the contract, but they are shared across everything you do, so they reach the invoice through a rate.
No rate, no indirect billing. Companies that skip this step invoice direct cost only, quietly fund their own overhead for months, then try to catch up with a retroactive adjustment nobody budgeted for.
A company billing $60,000 a month of direct labor with a real 85 percent combined indirect rate is leaving roughly $51,000 a month uninvoiced. Four months of that is $200,000 of your own cash funding the government’s project.
Provisional rates are estimates, and they are supposed to be. You bill at them during the year, then the incurred cost submission trues them up against what actually happened. Set them too low and you underbill all year and wait for settlement. Set them too high and you repay. Either way the money moves against you, so the estimate should be honest rather than convenient.
Read these twice
Two clauses that catch people
Limitation of Cost, or Limitation of Funds
Fully funded contracts carry Limitation of Cost (FAR 52.232-20). Incrementally funded ones carry Limitation of Funds (FAR 52.232-22). Both require you to notify the contracting officer in writing when you expect to reach a stated percentage of the estimated cost or the funded amount, commonly 75 percent, with an estimate of what completion will take. Work beyond the ceiling without that notice and the government is not obligated to pay for it.
The trap is that this is a forecasting obligation, not a bookkeeping one. You cannot comply by looking at last month’s numbers. You need to see the burn coming.
Fixed fee withholding
On cost-plus-fixed-fee work the contracting officer may withhold a portion of the fixed fee until the contract is complete and the final rates are settled. Plan cash around getting the last slice of fee late, not at the end of performance.
The long tail
What the year after looks like
Award is the beginning of the obligation, not the end. The sequence that follows is the part almost nobody describes before you sign.
Close the books, apply the rates, invoice, and watch the burn against the funded ceiling.
The incurred cost submission is due. It covers all your flexibly priced work, not just this contract, and the schedules have to tie to each other and to the general ledger.
An adequacy review, then an audit, then negotiation, then a final rate agreement letter. Until that letter exists the year is not closed and the contract cannot be closed out.
We cover that sequence in detail in the incurred cost submission guide, and what the government tests in the pre-award vs post-award guide.
How we help
What this costs
A first cost-type award setup is quoted fixed fee once we see your books. It covers the chart of accounts rebuilt for job cost, timekeeping configured and running, the indirect rate structure built and documented, provisional billing rates prepared, and the first month closed with a CPA review. For a company with current books that typically runs from $3,000, and the SBIR Phase II guide covers the version of this that arrives with a Phase II award.
Running it afterward starts at $800 a month for Core, or $1,500 for Cost-Type, which adds monthly indirect rate calculations and provisional billing rates tracked against actuals. Published on the pricing page.
We reply to every inquiry within one business day. If you already have an award date or a billing deadline, say so on the first call.
Questions
Frequently asked
We won a cost-plus contract. Do we need a DCAA compliant accounting system?
Yes, in substance. A cost-reimbursement award requires an accounting system the government finds acceptable, because it is paying your recorded cost. The system is usually evaluated before award on Standard Form 1408, and it can be reviewed again during performance. No software is approved on its own; what gets judged is your chart of accounts, job costing, timekeeping, rate structure and written procedures.
Can we invoice before our indirect rates are approved?
You can usually invoice direct cost, but you cannot bill indirect cost without a billing rate in place. Submitting provisional rates early matters more than getting them perfect, because every month without them is a month of overhead you are funding yourself.
Does everyone have to fill out a timesheet, or just people on the contract?
Everyone. Indirect cost is allocated across your total labor base, so the base is only right if all hours are recorded, including administrative and overhead time. A floor check can also ask anyone in the building what they are charging today.
What happens if we spend past the funded amount?
Under Limitation of Cost or Limitation of Funds you must notify the contracting officer in writing when you expect to reach the stated threshold, commonly 75 percent, with an estimate to complete. Without that notice the government is not obligated to reimburse cost above the ceiling, and that money is usually not recoverable afterward.
When is our first incurred cost submission due?
Six months after the end of your fiscal year, under FAR 52.216-7. It covers all of your flexibly priced work for that year, and the first one is harder than people expect because it is the first time the year’s bookkeeping is examined as a cost record rather than as a tax return.
How long does it take to get ready?
Four to eight weeks for a company whose books are current. The constraint is rarely software. It is deciding what belongs in each indirect pool and then running one real month through it end to end.
Our current accountant does our taxes. Is that enough?
Often not, and that is not a criticism of them. Job cost by contract, indirect pools and bases, FAR Part 31 unallowables, timekeeping that survives a floor check and the incurred cost submission are a separate discipline. Many firms split it: tax stays where it is, compliance goes to a specialist. We wrote about that in this guide.
More
Related services and guides
The contract brief: what to pull out of the award
What the FAR requires in a contract brief, what DCAA tests when it checks your briefing process, and a free Excel template.
Provisional billing vs forward pricing vs final rates
Three indirect rates, three purposes. Which one bills, which one prices, which one settles, and what confusing them costs.
How to choose a CPA firm for government contracting
The six questions to ask, what disqualifies a firm, what it should cost, and when you don’t need a specialist.
How much does DCAA compliant accounting cost?
Published numbers for the system build, the monthly work and the incurred cost submission, plus what moves the price.
How to calculate indirect rates for a small business
Fringe, overhead and G&A with a worked example for a ten-person firm, and what must come out of the pool first.
How to bill a cost-plus contract
What goes on the voucher, how indirect cost reaches the invoice, what gets withheld, and why vouchers come back.
SF 1408 readiness self-check
11 questions, about 3 minutes. See which parts of your system an auditor would flag.
DCAA compliant accounting system setup
Chart of accounts, job cost, timekeeping and rate structure, built in your own QuickBooks.
Indirect cost rates and provisional billing rates
Pool and base design, provisional rates under FAR 42.704, and final rate settlement.
Guide: incurred cost submission
Due dates, the ICE model schedules, and what the adequacy review checks before the audit starts.
Alexander Mungov, CPA
Founder and principal, M2 CPA
Alexander Mungov spent twelve years at the Defense Contract Audit Agency, in the Denver, European and Afghanistan branch offices, finishing as a Supervisory Auditor leading a team of six. He then built and ran the FAR, DFARS and CAS compliance program inside a defense technology company, as the primary liaison with DCAA and DCMA.
He founded M2 CPA to give small and mid-size contractors the compliance support that large primes take for granted. More about Alex.
Sources: FAR 52.216-7 (Allowable Cost and Payment), FAR 52.232-20 (Limitation of Cost), FAR 52.232-22 (Limitation of Funds), FAR 52.216-8 (Fixed Fee), FAR 42.704 (billing rates), FAR Part 31 (contract cost principles), and Standard Form 1408. Dollar examples are illustrative. This guide is general information, not advice on a specific contract.
Award in hand and nothing set up?
Tell us the contract type, the award date and how you keep the books today. We will tell you what has to exist before your first invoice and how long it takes.